BP Plc to Write Off $17.5 Billion Of Assets as Demand Levels for Oil Takes A Deep Dive

Summary

• The outbreak of the coronavirus has led to the sharp plunge in manufacturing and transport activity in the United Kingdom
• Production levels far outstripping demand across all geographies leading to a massive fall in international crude oil prices
• The has been a paradigm shift witnessed in people’s preferences to natural gas and renewable energy resources
• BP Plc going to write off $5 billion of its assets because of the changing landscape of the crude oil sector

The outbreak of the coronavirus brought about sudden changes the way the world functions. The biggest causality of the outbreak was the transport sector, first airlines across the world were suddenly grounded, and only military and special purpose aeroplanes flew. When lockdowns were imposed in many countries, the vehicular movement also came to a standstill. The combined effect of both these factors ensured that the demand for crude oil took a nosedive to reach Unprecedented levels. In the United Kingdom, these two factors affected the fortunes of the country’s two largest Oil & Gas exploration and production companies BP Plc and Royal Dutch Shell Plc.

BP Plc came with an update that it is going to write off $17.5 billion of its assets because of the changing landscape of the crude oil sector in the world. It is also to be noted here that the company has drawn down its forecast assumption for Brent crude oil prices from $75 per barrel to $55 per barrel on which its previous revenue guidance was based. This new estimate not only severely draws down on the future performance of the company but also makes several of its existing and future projects unviable.

A sudden drop in transportation and production activity levels across the world did bring about a sudden change in the demand for crude oil, but the production of the commodity could not adjust with it as dramatically. The oil-producing countries did try to collude to cut production so that an uncontrollable drop in international crude prices may be controlled, but a scuffle among themselves led to a massive drop in crude oil prices in the second half of March this year. This was followed by West Texas Intermediate future selling at negative rates in April due to storage concerns in the United States which was an unprecedented event in history. Since then prices have stabilised for the commodity but are way low than what they were prior to March 2020.

In the recent past, there has been a change in preference of people from crude oil to less polluting vehicular energy sources like natural gas and electricity. In the United Kingdom, nearly 40,000 people are estimated to have died prematurely due to vehicular pollution in 2019 alone, and hundreds of thousands are suffering from long term ailments. People have started to realise the dangers of excessive carbon dioxide and carbon monoxide levels in the air they breathe in and are preferring electrically operated and natural gas using vehicles instead of petrol and diesel ones, not only that the emission level requirements of vehicles in the United Kingdom and the rest of Europe is becoming so high day by day that it is now practical to change to electric vehicles rather than gong for expensive diesel and petrol cars.

The United Kingdom is also a signatory to the European Union Pledge to progressively reduce its carbon footprint over the years. This pledge also binds British companies and requires them to take concrete steps and commit actions with strict timelines to reduce their own carbon footprints. BP Plc has in the recent past started to invest in renewable energy resources extensively to proportionately reduce its exposure to high carbon-emitting energy resources.

BP Plc – (LON:BP) BP Plc is the United Kingdom headquartered multinational Oil and gas company active in production, transportation, marketing as well as petrochemicals of crude oil and its derivatives. The company has consistently been ranked amongst the top ten companies in the world in terms of revenue by some of the most influential business magazines in the world. Over the years in addition to its traditional Oil & Gas business the company has started to invest heavily to increase its exposure to renewable energy resources like wind energy, solar energy, and biofuels which it believes is the key to the company’s future.

The company’s shares are listed on three of the prominent stock exchanges in the world. They are the London Stock Exchange where its shares also form part of the FTSE 100 index, the Frankfurt Stock Exchange and the New York Stock Exchange. At the London Stock Exchange, the stocks trade with the ticker name BP., which is also shared with its listing at the New York Stock Exchange and at the Frankfurt Stock Exchange it trades with the ticker name of BPE.

On the environment front, the company had pledged to raise, and nurture five companies working in the renewable sector and bring it up to the level of having a turnover of at least $1 billion by 2025. Other than that, the company had also pledged to make itself carbon neutral by 2050 by increasing its renewable energy portfolio and reducing its exposure to carbon-emitting energy resources.

The company had last week stated that it would reduce its workforce by 15 per cent in order to deal with the adverse market conditions ensuing out of the coronavirus pandemic. Also owing to the above, it is widely anticipated that the company will make a rejig of its dividend policy and try to work out its debt strategy. The company also faces an increasing payment liability to the government due to its carbon footprint, which it expected to be around $100 per tonne of carbon dioxide it emits from its activities by 2030.

The shares of the company increased by 1.79 per cent on the London Stock Exchange at GBX 327.00 at the market close on 16 June 2020.